"There is a challenge for buy-to-let developers in monetising more efficient properties, which is that you can’t legally mark up energy costs, so the benefit of lower bills can’t be offset directly by higher charges, despite those lower bills being achieved by the landlord’s investment. So how to benefit from this?"
- Simon Bones - Genous
Adding maximum value to a property is a key success factor for developers, but received wisdom is to stick with tried-and-tested approaches and avoid installing the latest tech and gadgets that buyers won’t pay for. So how should today’s forward-thinking developers view renewable and energy-efficiency technologies? Will these actually boost returns or are they just an additional cost that won’t pay back?
The situation is different depending on whether you are looking at a new development or complete renovation (in which case current building regulations will apply) or you’re looking at an existing building that isn’t going to be comprehensively upgraded from a fabric perspective.
The insulation standards inherent in building regulations mean that over 80% of new-build properties reach EPC A or B, so for these properties we’re thinking of smart technologies and renewable heating and solar power solutions.
By contrast, less than 4% of total housing stock is EPC A or B (less than 30% is A-C), and, with the government’s target minimum efficiency standards for rentals of EPC C by 2030, that means that most existing properties will not meet that standard.
Even if an exemption can be achieved, evidence is mounting that high-efficiency homes are becoming more valuable than low-efficiency ones, especially in the rental space: new Nationwide research indicates a 5.1% premium for buy-to-let properties of EPC C compared to E (or a 12.6% premium for EPC A/B).
Developers can therefore either pay up for high-efficiency properties today or buy less efficient ones and upgrade them – which is the strategy that boosts value-add if the upgrade is financially manageable.
There is a challenge for buy-to-let developers in monetising more efficient properties, which is that you can’t legally mark up energy costs, so the benefit of lower bills can’t be offset directly by higher charges, despite those lower bills being achieved by the landlord’s investment. So how to benefit from this?
Ultimately, as consumers get better informed about the costs of running a property, they should start to factor this into the rent that they are prepared to pay. Where money is directly paid for an energy efficiency measure (e.g. an export payment for solar power), this may be an easier sell, but for those with existing tenants, having solid information about how much utilities should have gone down for that tenant could be a powerful tool in rent negotiation.
So if a more energy-efficient home could be lower cost to run, more attractive to tenants (or buyers), and ultimately more valuable, how should developers think about incorporating energy efficiency measures into their development strategies?
For new properties/complete renovations, our top tips are:
(1) Go big on solar (PV) panels. EPCs are flattered by larger arrays and the incremental cost for more panels is low. Also, in-roof panels look better than on-roof ones, and need less roof strengthening plus they save money on tiles, meaning they needn’t cost more. Especially for larger properties (whose EPCs are worse than an equivalent smaller property), this can often keep you at EPC A/B
(2) Consider (wet) underfloor heating and heat pumps. The latter are greener and can be low-cost to run but both EPC and run costs are improved by super-low flow temperatures, which are only possible with underfloor heating. Underfloor has always been a premium solution, but now it adds performance benefits, too.
For those with existing properties, the options are more complex and depend on building age, size and type. Experts like Genous can advise on the costs, payback and EPC and tenant benefits of different technologies – whether for potential acquisitions or existing portfolios - but, again, our top tips are:
(1) Insulate where it’s easy and inexpensive. Unfilled cavities in 1930s to 1980s buildings and lofts with less than 150mm of existing insulation are the best options. Structural insulation (including floors), glazing and doors are more expensive
(2) Solar panels again. It’s more expensive when scaffolding isn’t already there and the roof is already in place but is still a great payback and a way to boost the EPC
(3) Heat pumps should be considered if the property is on oil, LPG or direct electric, as this should save money but will benefit the EPC considerably. With a modern boiler on mains gas, it’s less obvious unless you’re selling on the environmental benefits, in which case nothing can boost a property’s environmental credentials more than a heat pump. Even if a heat pump isn’t viable, consider smart heating controls and a new boiler if the old one is less than 80-85% efficient.
With these approaches, energy efficiency can become a key tool in improving the returns on development and ensuring that the property’s attractiveness can be maximised.
